by Scot Colyer, Advisors Asset Management
There are many indicators that we look for that tends to define cyclical market bottoms and give us signs of an upturn. Talking heads on TV often times are just talking their book. Recent investor lack of volume and record high cash balances can also point to a change toward higher market valuations. Every day I hear about the relative cheap valuations of U.S. equities. We know that valuations can stay depressed for years, even decades. Why would we be thinking that a potential melt-up might be about ready to happen? Remember, market timing is generally ineffective and we caution that trying to time the market can be dangerous. We do believe that cash is a long-term losing position as inflation will render its purchasing power crippled over time.
Why could we possibly be bullish on U.S. equities now? After all, haven't you heard that the United States is slowing and likely going into a recession? Europe is melting down and it appears that LIBOR was being fixed by a number of large banks (which has been true for decades). Job creation is slowing and consumer confidence is lagging. We would point out that markets always focus on the crises of the day. We would note that banks and their earnings are coming in above estimates, showing continuing progress in decreasing delinquencies. Leading economic indicators are rising (emphasis on LEADING). Housing has turned up and record-low mortgage interest rates should propel pent-up consumption. Foreclosures are now being grabbed for cash. Look at the value of housing and housing-related stocks for proof. Finally, in all of history we have never had GLOBAL fiscal easing anywhere near the level we currently have. Most major developed and emerging economies are goosing their economies with cheap money. I would not underestimate the Fed or other central banks’ resolve here! We consider them a pretty reliable bid to support higher asset prices.
Finally, today it was reported that short interest on NYSE stocks have surpassed the September 2011 bottom. As many of you know, peaks in short selling often accompany cyclical market bottoms. We are now squarely in that category. When we analyze a number of indicators together, we believe there is a very high likelihood that equity prices may be moving much higher in the short term. Highly correlated income stories could potentially include investment in business development companies (private equity-like exposure), high yield and emerging markets.
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog.
